Aligning Pay With Purpose: ESG‐Linked Compensation and ESG Decoupling

Abstract

This study investigates the relationship between ESG‐linked executive compensation and ESG decoupling and examines the moderating role of CSR committees in this association. Using a global dataset of 36,055 firm‐year observations across 40 countries and 32 industries from 2005 to 2023, we find that ESG‐linked executive compensation is associated with a significant reduction in ESG decoupling, thereby strengthening the alignment between ESG disclosure and actual practices. The presence of a CSR committee further enhances this effect, with the interaction between ESG‐linked compensation and CSR committees leading to a more pronounced reduction in decoupling. Robustness tests using propensity score matching, instrumental variable 2SLS estimation and contextual analyses confirm the validity of our findings. Additional evidence distinguishes between greenwashing and brownwashing, showing that ESG‐linked pay mitigates overstatement of disclosure (greenwashing) but may incentivise understatement of disclosure (brownwashing). These results highlight the importance of adopting integrated governance mechanisms to mitigate symbolic compliance and enhance the credibility of ESG disclosure. The study offers important implications for corporate governance and sustainability, emphasising the need for policymakers and firms to strengthen the alignment of ESG incentives with accountability.